Optimal contracts for vertically connected, unionized duopolies.
Department of Economics Working Paper Series, 71.
Inst. für Volkswirtschaftstheorie und -politik, WU Vienna University of Economics and Business, Vienna.
In this paper a vertically structured duopolistic market with unionized price setting firms is analyzed. The form of the contract of the transactions between upstream and downstream firms can be linear pricing, franchising or vertical integration. It is known from literature (Irmen 1997) that the price elasticity of the industry demand and the degree of product differentiation are the decisive factors in the determination of the profit maximizing form of the contract. In this paper it is shown that the bargaining power of the union is an additional factor. With a higher bargaining power linear pricing becomes less preferable. (author's abstract)